Question

Please answer All of following questions

1. Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve decreases the money supply of the United States. Under a floating exchange rate system, the dollar would:

a. Depreciate in value relative to other currencies

b. Be officially revalued by the government

c. Appreciate in value relative to other currencies

d. Be officially devalued by the government

2. Which of the following is not a potential disadvantage of freely floating exchange rates?

a. Capital movements among nations may be hindered via exchange rate fluctuations

b. There may occur large amounts of destabilizing speculation

c. Demand schedules for imports and exports may be price speculation

d. They require larger amounts of international reserves than other exchange systems

3. Proponents of freely floating exchange rates maintain that:

a. Inelastic supply schedules prevent large fluctuations in exchange rates

b. The system allows policy makers freedom in pursuing domestic economic goals

c. Inelastic demand schedules prevent large fluctuations in exchange rates

d. Central banks can easily modify fluctuations in exchange rates

4. A potential limitation of freely floating exchange rates is that:

a. Countries are unable to initiate economic policies to combat unemployment

b. Exchange rates may experience wide and frequent fluctuations

c. Countries require a larger amount of international reserves than otherwise

d. Demand tends to be highly sensitive to price movements

5. A potential limitation of freely floating exchange rates is that:

a. Countries are unable to initiate economic policies to combat unemployment

b. Exchange rates may experience wide and frequent fluctuations

c. Countries require a larger amount of international reserves than otherwise

d. Demand tends to be highly sensitive to price movements

​​​​​​6. A potential limitation of freely floating exchange rates is that:

a. Countries are unable to initiate economic policies to combat unemployment

b. Exchange rates may experience wide and frequent fluctuations

c. Countries require a larger amount of international reserves than otherwise

d. Demand tends to be highly sensitive to price movements

7. To temporarily offset an appreciation in the dollar's exchange value, the Federal Reserve could ____ the U.S. money supply which would promote a (an) ____ in U.S. interest rates and a ____ in investment flows to the United States.

a. Increase, decrease, decrease

b. Decrease, increase, decrease

c. Increase, increase, decrease

d. Decrease, decrease, decreas

As a policy instrument, currency devaluation may be controversial since it:

a. Imposes hardships on exporters of the devaluing country

b. Is generally followed by unemployment in the devaluing country

c. Is generally followed by price deflation in the devaluing country

d. Imposes hardships on the exporters of foreign countries

Answer 1

1) Option C is correct because as US Federal reserve decreases  the money supply interest rate will rise and hence more foreign investment will be done in US led to the higher demand for US dollar in the market and hence US dollar appreciates relative to other currencies

2) option D is not a disadvantage of freely floating exchange rate

3) Option B is correct because proponents of this system maintain that it is more effecient for one price to change than to change all internal prices

4)5)&6) Option B is correct . Potential limitation of freely floating exchange rate is that exchange rate will experience more volatile , prone and frequent fluctuations

7) option A is correct Because by increasing money supply ,LM curve will shifts to the right and as a result interest rate will decrease which will influence investment decision that is because of lower interest rate investment inflow in US will decrease

8) option D is correct . As currency devalues , imports become relatively expensive and hence foreign exporters find it difficult to supply goods to devalued country.